Canada, Europe Banks Weigh Rates

Canada, Europe Banks Weigh Rates

It’s potentially a big week for the forex market in terms of central bank action, with the Bank of Canada set to make a decision on monetary policy on Wednesday morning and the ECB to follow on Thursday.

By Tuesday, October 20, 2015 - 00:00

Canada, Europe Banks Weigh Rates

The ECB decision could well be influenced by growing deflationary concerns for the eurozone, a theme that will not have been helped any by today’s release of German producer prices for September. The German PPI fell a larger-than-expected 0.4% last month, following a 0.5% decline in August, which depressed the annual change to -2.1% from -1.7% in the month prior. This is the most negative annual PPI measured since January and unsurprisingly much of the falloff was driven by lower energy prices, though the PPI fell 0.1% on the month even when stripping out energy. We would expect falling producer prices to pressure consumer prices going forward, and consequently today’s report will give a small fillip to expectations for further stimulus action from the ECB on Thursday. Pulling in the other direction, though, were signs of solid lending from eurozone banks — the ECB’s lending survey for the third quarter showed net credit tightening falling to -4% from the -3% reported for April to June and the result will likely reassure the central bank that its stimulus measures are working to provide sufficient liquidity. EUR/USD rose 0.32% to 1.1364 in early trading on Tuesday.

The Bank of Canada, meanwhile, has seen encouraging developments in Canadian GDP, with the report released this month confirming growth in both June and July, the first back-to-back growth for its economy since Fall 2014. Other positive signs for the Canadian economy have included big gains for the housing market heading into the final quarter, while inflation appeared to stabilize in August, and Governor Stephen Poloz is accordingly expected to announce no change to monetary policy on Wednesday. The Loonie slid to a one-week low against the US dollar in the aftermath of Monday night’s election victory for Justin Trudeau’s Liberal Party in Canada, ushering in an era of greater infrastructure spending that will be financed by running fiscal deficits for the next three years. The Canadian dollar subsequently rallied though, suggesting the initial move was an overreaction, and on Tuesday morning USD/CAD was down 0.29% at 1.2978.

The main US economic release of the day was data for new housing construction. September housing starts rose to a stronger-than-expected annualized pace of 1.206 million, inflated by a big jump in multi-family units, while August’s starts were revised up to 1.132 million from the originally-reported rate of 1.126 million. The good news was offset to a significant degree, though, by weakness in building permits, which sunk to an annualized 1.103 million from 1.161 million in August. The overall upward trend for housing still appears to be intact, though the decline in permits suggests this forward momentum may be sorely tested in coming months.

IBM reported earnings after the market last night that beat expectations, but revenue was lower than anticipated, and shares in the company fell 5.3% in early trading. Other Dow components reporting were Verizon, Travelers and United Technologies, who all beat with earnings and saw their share prices advance well over 1%. IBM has a higher weighting in the Dow Jones than any of these other companies, however, and its decline dragged heavily on the index. Shortly after the open on Wall Street, the Dow Jones was trading down 77 points or 0.45%, while the broader S&P 500 Index fell just 0.10% to 2031.5.

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